COVID-19: Economic Implications for Travel and Trade

As of March 7, over 70 countries have
confirmed cases of COVID-19, a respiratory coronavirus that originated in China
in December. Since the initial outbreak, there have been 101,583
confirmed cases and 3,460 deaths. The U.S. alone has reported over 250
cases. The coronavirus and corresponding containment efforts have led to
decreased demand within the tourism industry, factory closures, port
congestion, and the disruption of trade routes and supply chains around the
world. The virus has illustrated the complexity of modern-day global
interconnectedness and inspired fears of a global
economic crisis.

Travel

The outbreak has significantly impacted every sector in
the hospitality and tourism industry. The Chinese are the world’s
largest consumers of automobiles, smartphones, and luxury goods. As such,
they represent an important segment of demand within these industries. Additionally,
Chinese tourists account for a significant portion of demand in the tourism
industry, with 180
million Chinese citizens holding passports. The travel industry produces $5.7
trillion in revenue and supports 1 in 10 jobs. China is the largest travel
market in terms of spending, and Chinese tourists spent about $277 billion
in 2018. As Chinese shoppers and tourists suspend activity, the backlash of
decreased demand has been felt across the world. American hotels and retailers
rely heavily on Chinese consumers and visitors, and the decline in travel from
Chinese and other Asian countries is expected to result in a loss of $7.7
billion in visitor spending by the U.S.

The virus has already impacted every sector of the industry, from air carriers and cruise ships to hotels and international business conferences. Most airlines, including Delta Airlines, United Airlines, and American Airlines, have cancelled, suspended, and postponed services to mainland China and Hong Kong, with some airlines including suspensions of operations to and from Japan, South Korea, Singapore, and Italy.

On February 3, U.S. Customs and Border Protection (CBP) issued a bulletin detailing travel restrictions for travelers who had visited China within 14 days of visiting the United States. These entry restrictions were carried out in response to the January 31 Presidential proclamation titled “Suspension of Entry as Immigrants and Non-immigrants of Persons Who Pose a Risk of Transmitting 2019 Novel Coronavirus and Other Appropriate Measures to Address this Risk.”

According to the International
Civil Aviation Organization (ICAO), foreign airline capacity for travelers
to and from China has decreased by 80%. As a result, airlines have been forced
to implement cost-cutting measures that negatively impact workers. Lufthansa requested that its employees take unpaid leave, and
both Lufthansa and Singapore Airlines issued recruitment freezes. The
International Air Transport Association estimates the total revenue loss for
commercial airlines due to the outbreak could amount to between $63
billion and $113 billion.

Corporate travel has declined
sharply, with major companies such as Goldman
Sachs, JP
Morgan, Salesforce,
Amazon,
Nestlé,
and Twitter
canceling business trips and conferences, implementing non-essential travel
bans, and encouraging employees to work remotely. Worldwide, conferences have
been cancelled, postponed, or shifted to a digital platform. Affected
major conferences include Facebook’s F8 conference, the Global Marketing
Summit, the Game Developers Conference, EnTech Asia, Google News Initiative
Global Summit, and the ASEAN Summit.

Continued cancellations from both corporate travelers and tourists have already begun to damage the hotel industry. Various hotels and resorts rely on China for large portions of their profit, like Las Vegas Sands, which earns 90% of its income in China. Hilton estimated that its full-year adjusted earnings would take a loss between $25 million and $50 million, and Hyatt noted that the decline in Chinese travel had already impacted hotels in Singapore, Japan, and Bali.

Trade

The mass quarantine of employees
led to factory shutdowns and delays that ultimately created challenges for 7,000
Chinese exporters. As China’s factories account for a quarter of global
manufacturing output, these delays and barriers to
production have affected supply chains worldwide. Many companies have found
themselves unable to obtain necessary raw materials produced in China. Some
have lost contact with their Chinese suppliers, or do
not trust that they will ultimately receive shipments they order.

Apple serves as an example of the
precarious choice to concentrate manufacturing activity heavily in a single
region. The company’s market value has declined by more than $100
billion as a result of the virus. Other large companies such as McDonald’s
and Starbucks have also been forced to reduce activities in China. Small
businesses have seen activities stop completely, finding themselves particularly
vulnerable to the disruption caused by coronavirus. In the United States, a
congresswoman introduced
legislation to assist small businesses in the U.S. suffering economic harm.

About 80%
of the volume of trade in goods worldwide is carried by sea, and seven of
China’s ports rank in the top
ten world container ports by volume. Large shipping companies have reduced vessel
numbers, and others idle while port officials examine crew to ensure they are
virus free. Singapore, for example, began requiring health declaration forms
for any vessels that called at ports in mainland China within 14 days.

The Port of Los Angeles
facilitates more containers per year than all other ports in the Western
Hemisphere. In the first quarter, 60
container ships were cancelled at ports in Los Angeles and North Beach,
California. Between February and April, 110 trans-pacific sailings to North
America were cancelled. As factories fail to meet production capacity, container
shipping lines lack a reason to sail. In the U.S., goods that cannot ultimately
be exported often end up being sold at a loss in the domestic market.

Approximately 30
million Chinese truckers were prevented or hampered from working due to the
coronavirus outbreak. The cost of transporting a shipping container 1,000
miles in China has increased from $1,500 to $3,000. France’s
railway company SNCF continues to lose several million euros per month due
to its reliance on Chinese production of goods and services. In the U.S., analysts
predict that the coronavirus outbreak will continue to prolong the decreased traffic
in the shipping industry. The Cass Freight Index saw its largest
decline since 2009 with a decrease of 9.4% from the same month one year prior.

How to protect your company against potential
disruptions

The coronavirus outbreak
represents an opportunity to think more broadly about health epidemics as a
business risk and to establish best practices for future disruptions.

Create an emergency response plan based
on a comprehensive risk assessment that considers protocol for decision
making and communication.

Supply chain visibility

Companies who know their supply
chain thoroughly will be best prepared to handle disruptions such as the
coronavirus. Remain in contact with each of the suppliers in your supply chain
and engage with them to understand the difficulties they experience. Rely on
safety stocks and alternative sources to ensure the stability of your supply
chain.

Be aware of the components of
your supply chain that hold the highest risk – for example, do you rely heavily
on a single firm that may soon be affected by the outbreak? Expect disruptions
within your supply chain and consider alternate methods of obtaining materials
that could become unavailable. Find a backup source for supply, production, and
distribution, and seek alternate vendors outside of affected areas.

Human Resources

Explore methods to ensure the well-being of your employees. Encourage employees in affected areas to report symptoms and stay home during the incubation period. Be prepared to implement remote and flexible-working arrangements if your area experiences an outbreak. Communicate clearly and work to ensure that employees throughout your supply chain are practicing prevention methods and remaining home if they could be infected. Quality communications can help you avoid negative public opinion and accusations of mishandling the situation.

CT Strategies offers a variety of advisory services that can help your company navigate supply chain and customs-related challenges. To learn more about our service offerings and find out how we can help you minimize supply chain risks, please get in touch with us at https://ct-strategies.com/home/